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YOLO: Mortality Beliefs and Household Finance Puzzles

Rawley Heimer (), Kristian Myrseth and Raphael Schoenle ()
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Rawley Heimer: Federal Reserve Bank of Cleveland
Kristian Myrseth: University of St. Andrews
Raphael Schoenle: Brandeis University

No 97, Working Papers from Brandeis University, Department of Economics and International Businesss School

Abstract: Subjective mortality beliefs a ect pre- and post-retirement consumption and savings decisions, as well as portfolio allocation. New survey evidence shows that individuals overestimate their mortality at short horizons and survival rate at long horizons. For example, a 28 year old male with a 99.4% chance of surviving beyond 5 years believes he will do so with 92.8% probability. A 68 year old with a 71.4% probability of living to 78, believes he has a 82.4% chance of living that long. The formation of these beliefs across age cohorts can be attributed to overweighting the most salient causes-of-death, which change over the life-cycle. This bias matters empirically: Survival expectations correlate with heterogeneity in nancial education and investment behavior. Embedded in a run-of-the-mill life-cycle model, these beliefs cause the young to under-save (they have 10% less saved upon retirement) and retirees to not fully draw down their assets (they consume 12% less during retirement). In addition, for reasonable levels of risk- tolerance, the required excess rate of return on equity is in line with historical averages once subjective beliefs are accounted for.

New Economics Papers: this item is included in nep-age
Date: 2015-11
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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP97.pdf First version, 2015 (application/pdf)

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